Published 4:00 am, Wednesday, October 30, 2002

A widely watched reading of consumer sentiment plunged in October to its lowest level in nine years, a signal that American households may cut their spending, threatening economic recovery.

The consumer confidence index of the Conference Board, a New York research group, tumbled to 79.4 this month from 93.7 in September, a bigger drop than forecasters had expected and the sharpest one-month fall since right after the September 2001 terrorist attacks.

"It was a very sharp decline, which puts a cloud over the holiday shopping season," said Conference Board consumer research director Lynn Franco.

The threat of war in Iraq, a troubled stock market and high unemployment are causing Americans to lose faith in the economy, Franco said.

The possibility that consumers are retreating makes it more likely that Federal Reserve policymakers will cut short-term interest rates from their already low levels when they meet next week, economists said.

Investors, who have largely ignored bad economic news and pushed stock prices up in recent weeks, were disappointed by Tuesday's report.

The Dow Jones industrial average was little changed, rising 0.90 to 8,368. 94. But the Nasdaq composite index fell 15.29 to 1,300.54, while the Standard & Poor's 500 index was off 8.08 to 882.15.

During the past two years, while businesses have cut back spending, consumers have continued to dig into their wallets, tap their bank accounts and borrow to buy homes, cars, building materials, appliances and electronic goods, among other items.

Consumer spending represents about two-thirds of all economic activity, and the willingness of ordinary Americans to reach for their credit cards has kept the economy afloat. A big pullback by households could knock the props out from under the recovery.

To be sure, confidence surveys don't always send a clear signal on how consumers will behave, forecasters note. Rising incomes and low interest rates can sometimes offset consumer anxiety and support spending.

"If consumer confidence is sinking, then why did mortgage applications for the purchase of a home advance . . . in October?" economists at Moody's Investors Service asked in a note Tuesday.

Still, recent retail data show that nervous consumers have been cutting back in the past few months on just about everything except homes. A report Tuesday showed sales slipping 1.9 percent during the week ended Oct. 26 at big general merchandise chain stores.

"I'm not spending much, and I'm saving more. I haven't been on any trips since Sept. 11," said Hercules resident Sheila Green, 37, a loan manager at a San Francisco credit union.

"The economy is bad. We don't have any jobs," Green said. "And it's not going to get any better if we go to war with Iraq."

Not only did survey participants offer a bleak view of current business conditions, but they also sounded a dramatically more pessimistic note on the prospects for the economy six months from now. The index's expectations component plummeted to 80.7 from 97.2 in September.

The proportion of participants who said business conditions were bad rose. In addition, 27.3 percent of those responding said jobs were hard to get in October, compared with 14.8 percent who thought jobs were plentiful. The gap between those who viewed the job market as healthy and those who thought it was sick was wider than at any time since 1994, according to Moody's.

Virtually the only good news for the economy was that consumers didn't cut back spending plans as deeply as the falling confidence numbers suggested they might. The percentages of survey participants who said they intended to buy homes and cars fell only slightly, while the percentage of those who said they plan to buy appliances actually rose.